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Tuesday, January 02, 2007

Democracy and globalisation

Are democracy and globalisation mutually supportive? A new BIS working paper by Barry Eichengreen and David Leblang, Democracy and globalisation, finds a positive two-way relationship. Here is the abstract:

The relationship between democracy and globalisation has been the focus of substantial policy and academic debate. Some argue that democracy and globalisation go hand in hand suggesting that unrestricted international transactions leads to increased political accountability and transparency. And, politically free societies are likely to have minimal restrictions on the mobility of goods and services across national borders. Others argue that the causal relationship should be reversed: democracies are more likely to have closed markets and vice versa.

We examine these relationships between political democracy and trade and financial globalisation over the period 1870-2000 and treat both democracy and globalisation as both cause and effect. Our empirical strategy uses instrumental variables and estimates relationships using the Generalised Method of Moments framework. Our general findings support the hypothesis of a positive two-way relationship between democracy and globalisation.

This paper is one of several presented at a BIS conference last June on Financial Globalisation. The papers have recently been posted online, including comments on the Eichengree and Leblang paper by Harold James and Marc Flandreau. Worth a look.

Comments

"Some argue that democracy and globalisation go hand in hand suggesting that unrestricted international transactions leads to increased political accountability and transparency."

This is, at its very least, wishful thinking. That is, it is worth while thinking that this happens, in hopes that the wish is fulfilled. It also can become a self-fulfilling prophecy.

I revert to the Maslow's Hierarchy of Needs when thinking of what motivates humans. The first level consists of meeting rudimentary needs like shelter and nourishment to survive. The higher levels show mankind striving not only for survival but for personal self-betterment - this latter is most often a matter of personal choice amongst opportunities to pursue.

International trade (call it "globalisation") invokes the principle of comparative advantage to provide the increase in general wealth within a community or a nation. So, one might conclude that it also provides mankind with the ability to perfect not only a social and economic existence but a political system where fellow citizens can find expression and participation in the decisions that determine their fate.

We are still a long way from that point, however. For the moment, we are running in place within a political system of democratic representation (a republic whereby citizens elect their representatives to a legislature). This system is hitting a wall of human incompetence, as life becomes increasingly complex. Legislatures cannot legislate all aspects of life and the people that constitute them are, after all, simply human.

The next step, I feel, is that participative democracy must take on the aspects of a higher dimension - that of multiple referendums where citizens assume the responsibility to make key legislative decisions. Or, at least, to have the right of overview and revocation of laws (that they see unsuitable in either the means or the objectives) by means of referendum. In Europe, the vote on a tediously verbose Constitutional proposition, that people sensed did not address their needs, was a case in point.

The Swiss have, for over 150 years, perfected the referendum vote such that ordinary individuals may have their word to say, by means of the referenda voting. It's a model that the “democratic” world should consider seriously.

The great danger in this particular evolution is to think that individuals are not sufficiently intelligent to participate in the decision-making. This is dreadfully wrong. They must participate in the decision-making of not all matters, but certainly those that are key decisions that affect their lives.

I would argue that globalization is essentially an economic phenomenon inherent to the capital system, i.e. that it is a manifestation of this system's necessary expansiveness and can be clearly seen in such modes of organization as transnational firms. As this, the second phase of globalization, has been unfolding there has also been an uneven interpenetrating of formerly national economies, which takes us a step beyond notions of interdependence.

On the other hand we have a system of national states; these cannot globalize but do compete, and a political-economic competition which can be intensified through their interactions with transnational/global firms as these latter are quite able to play nation against nation. Such competition tends to heighten nationalisms, to work contrary to the increasingly global economic, and nationalisms which can easily transform not into greater democracy but the contrary.

There is incongruence, contradiction, between the economic and the political.

JO: "I would argue that globalization is essentially an economic phenomenon inherent to the capital system, i.e. that it is a manifestation of this system's necessary expansiveness and can be clearly seen in such modes of organization as transnational firms."

Why a phenomenon? Marco Polo was a phenomenon when he opened the silk route to China?

Worldwide trade has been around since human beings stumbled upon rudimentary comparative advantage (long before Ricardo articulated the idea). Trade was an obvious consequence. Archaeologists are just discovering the ages of trade routes from antiquity and many of them follow current roads and highways across many thousands of kilometres.

Whether it is done by multinationals, transnationals or export-import offices is irrelevant, I suggest ... a bit of journalistic licence to describe an historically human economic function.

"Global" has replaced "International" or "World Trade" in contemporary news reports/articles. That is about all that has changed cosmetically.

How peoples exchange goods and services may be substantially different. The insurability of goods in transit, prepayment by means of electronic transfers, containerizing shipping, international fairs, etc., etc.; all these devices greatly enhance trade. But, I doubt they change it fundamentally.

You have to distinquish between different social relations of production, i.e. capitalism is not feudalism, otherwise we are left with ahistoric generalities and a type of stasis in which production-in-general is confused with what is specific and historically limited. 'Journalist license' is exactly what we find in reductionist imaginings that the modern system has always been and, by extension, will always be.

A system of generalized commodity production, capitalism, has been/has to be expansive in ways that the old mercantile relations did not. The process of commodifying everything is inherent to the present system...production is no longer soley for use by the direct producer with some surplus available for trade, but specifically for sale. There are, as you should know, dramatic quantitative and qualitative differences between the present system and that which it displaced. Ricardo's comparative advantage was more to do with British free trade ideology used to justify an unequal exchange. Even his famous wool for wine example does not hold up when placed against the realities of the time. Differently, imperial centers seek absolute advantage, which is just what Britain, and more recently the U.S., has been able to do.

Perhaps, even though from 1914, this quote might clarify where we are today:

"The forces of production which capitalism has evolved have outgrown the limits of nation and state. The national state, the present political form, is too narrow for the exploitation of these productive forces. The natural tendency of our economic system, therefore, is to seek to break through the state boundaries. The whole globe, the land and the sea, the surface as well as the interior has become one economic workshop, the different parts of which are inseparably connected with each other. This work was accomplished by capitalism. But in accomplishing it the capitalist states were led to struggle for the subjection of the world-embracing economic system to the profit interests of the bourgeoisie of each country."

Then, phase I globalization, primarily inter-national trade; post-WWII and since ~1958, phase II globalization that's taken form as MNCs-TNCs-Global Enterprises as well as the inter-national...Still though, the same general contradiction as developed during the later 19th-early 20th centuries. On the quant side, you might take a look at UNCTAD data re. size and weight of TNCs which, by internalizing trade, have also changed its quality.

JdlO: "A system of generalized commodity production, capitalism, has been/has to be expansive in ways that the old mercantile relations did not. The process of commodifying everything is inherent to the present system..."

This is inherent in the market system. The offering of a product or a service grows only when its price is reduced, thereby accessing more consumer pocketbooks. Nothing can be done about that economic phenomenon, which is embedded in supply-theory.

However, the challenge is what is happening presently. It appears that whereas the "commodity class" of consumers are procrastinating expenditures, the "non-commodity class" (those with Bentleys and BMWs in the garage) are on a spending frenzy.

Why is that? Market dynamics have become dependent upon to two largely different kinds of consumer.

What can be imputed from this? That the market is working as it should. And, not much more.

Interest rates have been at historic lows and provoked economic growth wherever that growth has been seen - mainly in the Far East and somewhat in Europe. But, what is worrisome is the fact that in Europe we are witnessing a non job-creating growth cycle. Consumers are generally better off because purchasing-power of the Euro is expanded by cheap imports. But, employment remains stubbornly high and the social cost is consequently important.

Keynesian theory is therefore not working as it is supposed to. Why? Because of globalization. How's that?

We have the habit of looking at economics through focused prisms. That is, in terms of the usual economic poles - such as America and Europe. However, with the doubling of the world's workforce over the past decade and a half, the growth in manufacturing capacity, spurned by FDI to meet demand, is not happening in places that we are accustomed to see them happen (in America or Europe) ... but where FDI is provoking them - namely India, China or other points east of Europe.

Is this a forever phenomenon? Of course not. Economic variations are cyclic like a great many aspects of mankind's existence. Let it run its course. Because, there is not much in a liberal global market economy that we (meaning any one nation, even America, or group of nations like the G-7) can do about it.

(Except perhaps in France, where people think that the government in Paris is going to change the rules of free markets to save French jobs. Fortunately, France is the ONLY place in Europe where this sort of fallacy seems to have currency.)

Division of labor creates rather than exchanges value. It would be costly for anyone to produce everything they need. Globalization has increased world living standards. U.S. real GDP, for example, has tripled since 1976. However, U.S. living standards rose faster, in part, because of trade deficits and productivity from greater competition. Global economic interrelationships reduce risks of conflict.

What economic paradigm allows for every man woman and child on earth to: eat nutriously; own their own home; participate in the highest quality of education from birth to death; top quality healthcare; access to efficient state of the art communications technology; transportation to total social access; and freedom/time to experience life; and access to all common resources?

Shouldn't we satisfy those basic human needs first and then decipher/translate the economic system that supports it?

Once the stranger, you and I, only one of screen, Cordial greetings, deep blessing. Because a margin of words, deep will miss each other! My world is wonderful because of you! Plum sincerely wish you happy every day! Happiness forever!

It would be costly for anyone to produce everything they need. Globalization has increased world living standards. U.S. real GDP, for example, has tripled since 1976. However, U.S. living standards rose faster, in part, because of trade deficits and productivity from greater competition. Global economic interrelationships reduce risks of conflict.

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